The Government has seen a marked drop in its borrowing last month after it started to account for its levy on banks' balance sheets, new figures have revealed.

Public sector net borrowing, excluding financial interventions such as bank bailouts, was £20 million, compared to £3.5 billion in the same month a year ago, said the Office for National Statistics.

This was substantially lower than the £2.5 billion expected by the City.

The levy on banks' balance sheets contributed some £660 million in the month while public finances were also boosted by larger corporation tax receipts, VAT and lower spending by local government.

The figures come as the Government looks to meet the forecast of its tax and spending watchdog for borrowing of £122 billion in this financial year, compared with the £143.2 billion the previous year.

Samuel Tombs, UK economist at Capital Economics, noted that borrowing figures for earlier this year were revised higher and said July's improvement was not enough to hit the forecasts of the Office for Budget Responsibility (OBR).

He added: "Borrowing for previous months was revised up, so on current trends it will overshoot the OBR's full-year forecast of £122 billion by around £10 billion. This overshoot largely reflects the weakness of tax receipts."

A Treasury spokesman said the figures continue to show "deficit reduction taking effect with the public finances in balance in July".

He added: "However, as recent weeks' events have shown with the US ratings downgrade and continued turbulence in Europe, it is vital that the Government sticks to this plan."

The Government's tax receipts were last month boosted by 5.6% to £52.3 billion, helped by a 22% rise in receipts from VAT, after the rate was hiked to 20% from 17.5% in January. Corporation tax receipts were up £1 billion to £8.6 billion.